1. Pedro Gonzalez says

    If the Euro breaks the bonds from the perifery hold by the ECB should/will not be paid by the perifery countries. This will no be any problem, besides moral hazard. The money used by the ECB to pay for those bonds was created from thin air and nothing really serious will happen if those debts are not paid. I would not worry about inflation.
    The same with the debts owed to the German Central Bank.
    Futher more, if a German bank is not paid by the Spanish sovereign on a bond, the German Central Bank could create money to pay the german bank. Again nothing bad would happen. No inflation, etc., only moral hazard, but who cares about moral hazard?

  2. David_Lazarus says

    Using the Spaniard depositing in Germany as an example. Now if there is a credible risk of such restrictions being imposed on the Spaniard. What would there likely reaction be? They could simply exit the German financial system, creating a run on German banks. This could be as silent as the run on peripheral nations banks that the ECB is trying to plug now. It would not be contained to Spanish investors in German banks. If any other holder of euros was concerned that they too would have to suffer such losses then they would also withdraw as much as possible from German banks.

    The ultimate problem is that the assets outside Germany will be substantially devalued in a euro break up and that will crystallise losses for the German banks. If there is a break up it could start with Greece, who would have to default in full as the debts would be odious. The losses from Greece would be manageable and may have already been accounted for. If Greece goes on to recover quickly outside the euro, then it could rapidly cause the other weaker periphery nations to exit as well. Spain and Italy might be willing to stay longer because they could get more support but the ECB probably lacks the firepower to bail out both Spain and Italy. It might be the ripples of losses that nature that seriously hurts French banks. That will in turn, will lead to massive losses in German banks, who are big lenders to French banks. If the euro is not saved then the banks will go up in the flames. Though the costs to europe’s tax payers will be excessive. If however the banks are allowed to collapse then yes there will be a temporary crisis, but asset prices will fall to sustainable levels. There will be huge numbers of bankruptcies but with lower asset prices new businesses will find it even easier to start up. What we have now is a slow and steady drain to bail out banks with no prospect of recovery for the rest of the economy.

  3. Roger Marti says

    What happens to the deposits of banks or also other national banks at the bundesbank?

    1. David_Lazarus says

      They should be safe but if a bank were insolvent then the Bundesbank might use the banks reserves at the Bundesbank to make good any depositor. It will be the shareholders and then bondholders who would have to suffer losses. Though considering the appalling banking practice around the western world I suspect that the Bundesbank will bail out the bank to avoid nationalising it and to “ease its return to the market” by maintaining a share value. Pretty much in the same way that the UK government has done with Lloyds TSB and RBS, two banks that it had to nationalise in part. So while it owns the banks with majority stakes they refuse to use those stakes to implement shareholder lead change.

  4. francis says

    Your article assumed that Germany is converting back to the mark. A more realistic assumption is Greece leaving the Euro and going back to the Drachma but Germany (and all other EU members) keeping the Euro. In this case Germany would have TARGET2 losses.

    1. David_Lazarus says

      At this stage the euro will stay together. No one wants to leave. Not even the Greeks want to exit the euro. The problem is that the choice for Greece can only mean exit eventually, without a default. When you make debts impossible to default on you create unintended events. Greece is now far more likely to revolt that will increase the flight of capital from the rest of the periphery. This will damage even further the stability of the euro.

      If the Germans were to exit then the problem is that the euro would probably have a substantial devaluation, which would make the debt burden even higher and so less sustainable. It will crystallise huge losses in German banks. Since all these bailouts have been undercover bailouts of German banks that will mean that they will collapse creating problems for the German government who have made loans to bail out the periphery and the core banks.

      1. Francis says

        The latest Greek polls show that the anti Euro Syriza party is leading! But that’s beside the point. I would just like to have an acknowledgement from you that in the improbable case were Greece alone were to exit the Euro, and reintroduce the Drachma, Germany would have TARGET2 loses. Yes or No?

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